What is a DSCR loan and how do they work?

A DSCR loan, or debt service coverage ratio loan, is a type of loan that is commonly used in commercial real estate transactions. This loan is based on the debt service coverage ratio (DSCR), which is a metric used by lenders to determine the borrower's ability to repay the loan.

In a DSCR loan, the lender looks at the borrower's net operating income (NOI), which is the income generated by the property minus its operating expenses, and compares it to the loan payments. The DSCR is calculated by dividing the NOI by the loan payments, and a higher DSCR indicates a stronger ability to repay the loan.

DSCR loans are typically used for income-producing properties, such as rental houses, apartment buildings, office buildings, or shopping centers. The loan terms are often structured to match the property's cash flow, with longer loan terms for properties with longer-term leases.

DSCR loans may have higher interest rates than traditional loans because they are considered riskier due to the focus on the property's ability to generate income. However, they can be a useful financing option for borrowers who have limited collateral or need a larger loan amount than they would be able to secure with a traditional loan.